4th Circuit Ruling Supports ERISA Stock-Drop Plaintiffs

The 4th U.S. Circuit Court of Appeals has ruled in a long-running Employee Retirement Income Security Act (ERISA) fiduciary breach case filed against media publishing company Gannett Co., vacating and remanding the case back to the district court for renewed deliberations.

The underlying lawsuit alleges that Gannett, its benefit plans committee and other fiduciaries’ decision to concentrate plan investments in Tegna Inc. common stock was a breach of their fiduciary duties under ERISA. The plaintiffs claim these alleged breaches caused approximately $135 million in losses.

By way of background, the Tegna Inc. common stock in question was created in late June 2015, when the Gannett Co. split into two publicly traded companies: Gannett Co. and Tegna Inc. The plaintiffs contend the defendants’ decision to invest Gannett Co. retirement plan assets so heavily in a single company’s common stock during the class period was a breach of their duties of loyalty, prudence and diversification under ERISA Section 404.

As has often happened in similar cases since the U.S. Supreme Court issued an influential ruling known as Dudenhoeffer, the district court considering the case ruled summarily in favor of the defense. The technical reason was that the plaintiffs failed to state a claim under the high bar set by Dudenhoeffer. This is to say the district court concluded that defendants “could not have known that the single-stock fund was imprudent, nor were they obligated to diversify it absent any notice it was imprudent.”

But according to the new appeals court ruling, to state a claim in this instance, a plaintiff need only “plausibly allege that a fiduciary breached [a duty], causing a loss to the employee benefit plan.”

“Put simply, plaintiffs did just that—they set out facts describing how defendants failed to monitor a fund, which led to a failure to recognize and remedy a defect, which then led to a loss to the plan,” the new 4th Circuit ruling states. “Accordingly, we vacate the judgment of the district court and remand for further proceedings.”

Notably, a three-judge panel from the 4th Circuit was assigned to review the case, and only two of the justices signed onto the majority opinion to vacate and remand the district court ruling. The third judge issued a dissenting opinion that, in siding with the defense, reiterates many of the points made in pro-defense rulings issued in stock-drop cases after the Supreme Court ruling in Dudenhoeffer.

Helping to explain the break with the post-Dudenhoeffer tradition of courts rejecting similar stock-drop suits, the majority opinion in this matter seems to draw a distinction based on the fact that Gannett Co. and Tegna Inc. are two different companies. They may have a deep historical connection, but they are distinct entities for purposes of regulatory compliance, shareholder reporting, etc.

“It goes without saying that, post-spin-off, ‘New Gannett’ employees were not employees of Tegna,” the decision states. “Furthermore, there was no reason going forward [from the point of the spin-off] for New Gannett to make contributions to its employees’ accounts in the form of Tegna stock. Although historically connected, Tegna and New Gannett were now two different publicly traded companies. However, because ‘Old Gannett’ had made Old Gannett stock contributions for employees who now worked for New Gannett, the New Gannett plan had a significant investment in Old Gannett’s successor, Tegna.”

At the time of the spin-off in June 2015, the appellate ruling explains, the New Gannett plan allegedly held $269 million invested in Tegna common stock, representing more than 21.7% of the plan’s total assets. At the end of 2015, the plan still held $178 million in Tegna common stock, the price of which had fallen 19.3%, accounting for some of the decline. Then, at the end of 2016, the plan held over $115 million in Tegna common stock, according to the ruling, and, during that year, the share price had decreased a further 16%. Meanwhile, for two years after the spin-off, the defendants “maintained the frozen holding pattern for the Tegna stock fund before deciding in June 2017 to liquidate it over a 12-month period beginning in July 2017.

“Nevertheless, as of August 2018 (the date of plaintiff’s proposed amended complaint), the Tegna stock fund had still not been fully liquidated,” the appellate ruling states. “Plaintiffs allege that between the time of the spin-off and the decision to liquidate the Tegna stock fund, the Gannett benefit plans committee repeatedly received risk warnings related to holding large quantities of Tegna stock. As early as August 2015, one member of the committee received a letter from an investment firm alerting him that the plan had a ‘significant holding’ in Tegna stock that was ‘problematic.’”

The majority opinion summarizes its conclusion as standing in contrast with a previous ruling out of the 5th U.S. Circuit Court of Appeals.

“Plaintiffs’ claims are simple—the Tegna stock fund was an imprudent investment, defendants failed to monitor the Tegna stock fund and their failure to monitor the imprudent investment led to a failure to remove it, thereby causing a loss to the plan,” the ruling states. “However, this case is not simple. Defendants argue that Dudenhoeffer requires a plaintiff to additionally plead ‘special circumstances’ in order to state a claim that an investment was imprudent for want of diversification. Defendants also contend that, because the plan was of the defined contribution [DC] type, individual participants could choose how to allocate their own funds, thereby absolving fiduciaries of any responsibility for not divesting imprudent funds that are frozen to new investments.”

The ruling continues: “Addressing a case with near-identical facts and claims earlier this year, the 5th Circuit rejected the first argument (Dudenhoeffer), but accepted the second argument (participant choice). We agree with the 5th Circuit as to Dudenhoeffer but disagree as to the effect of participant choice on a fiduciary’s duties with respect to a defined contribution plan. Accordingly, we conclude that plaintiffs have stated a claim, and we reject defendants’ arguments that various considerations apply to bar plaintiffs’ claim at the motion to dismiss stage of litigation.”